With Mr P. Chidambaram back at the helm of the Finance Ministry, the Indian pharmaceutical sector, being on a catalytic path to growth, is awaiting with eagerness to see what unfolds in what is practically the last budget of the UPA government before the general elections.

Ernst & Young | Last Updated: February 18, 2013 16:52 (IST)

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With Mr P. Chidambaram back at the helm of the Finance Ministry, the Indian pharmaceutical sector, being on a catalytic path to growth, is awaiting with eagerness to see what unfolds in what is practically the last budget of the UPA government before the general elections. This article discusses some of the key expectations of the pharmaceutical industry.

There is an immediate need for clarifications on the CBDT circular on inadmissibility of expenses incurred in connection with medical practitioners by pharmaceutical and allied health sector companies in order to avoid ambiguity and unwarranted litigation. In its current shape and form, it is unclear on the scope of expenses sought to be covered and the manner in which it can be enforced.

Weighted deduction should be granted to units engaged in contract research activities and clinical research organization and it should be clarified that such deduction shall be available to any expenditure incurred outside the facility in order to remove present ambiguity. Further, excise and customs duty exemption should be granted on all products required for research and development (R&D) and more products used for such activities should be brought within the purview of this exemption.

On the transfer pricing frontier, it is essential to introduce the safe harbor rules in the sector and provide clarity to address the increasing disputes.

Further, formal guidelines for application of the Comparable Uncontrolled Price (CUP) method, under which the innovator should be differentiated from the generic, should be put in place. Also, there is a need for harmonization between the higher margins expected to be maintained by companies dealing in APIs/ FDFs (active pharmaceutical ingredients / finished dosage forms) vis-a-vis the cap published by the Drug Prices Control Order.

With a view to make available healthcare facilities in rural areas, a weighted deduction for capital and revenue expenditure should be provided. Separately, the government should implement a public private partnership model for establishing healthcare infrastructure in rural areas which could involve subsidies and exemptions to incentivize investment.

For the hospital segment, the tax holiday period should be extended to 10 years to enable them to cope with the huge capital outlay. The depreciation rate available on medical and pathological equipment/ medical devices should be increased from 15 per cent to 60 per cent.

In order to encourage overseas operations by Indian pharmaceutical companies, the government should tax the income received from overseas operations at a lower rate and provide a weighted deduction in respect of expenditure incurred on taking overseas product registration.

On the indirect tax front, the inverted duty structure of raw material vis-a-vis pharma formulations leading to unutilized Cenvat credit continues to be a perennial concern and there is an urgent need to bring relief by way of refund mechanism to address the said issue.

From a service tax perspective, the amended definition of 'input service' is likely to give rise to many interpretational issues with the field authorities denying credit on all legitimate business expenditure which have not been specifically provided for in the said definition due to deletion of the phrase "activities relating to business" from the definition. Accordingly, an amendment to the said definition is the need of hour.

To wrap up, one hopes that the Finance Minister acknowledges the suggestions in order to augment healthcare infrastructure and smoothen procedural issues, and provide the much required impetus to the pharmaceutical sector.